The Federal Reserve on Wednesday kept interest rates steady at 3.5% to 3.75%, its second pause after three rate cuts late last year. The Federal Open Market Committee (FOMC) voted 11-1 in favour of the decision, with Governor Stephen Miran dissenting in support of a 25 basis point cut.
Economy steady but outlook uncertain
The Fed said the economy continues to expand at a “solid pace,” though job gains have slowed and inflation remains somewhat elevated.
Policymakers also flagged that uncertainty around the economic outlook “remains elevated,” especially due to tensions in the Middle East.
Powell says inflation still a concern
Fed Chair Jerome Powell said slower hiring shows weaker demand for workers and lower immigration. He also noted that tariffs are pushing up goods prices, keeping inflation elevated. Powell added that the current rate is “within a range of neutral.”
“The implications of events in the Middle East for the US economy are uncertain,” Powell said. “In the near term, higher energy prices will push up overall inflation, but it is too soon to determine the scope and duration of the potential effects on the economy.”
War-driven fuel costs add pressure
Rising fuel prices are expected to increase overall inflation and worsen affordability concerns. “Higher fuel costs, along with the downstream effects on shipping, travel and trade, are likely to add further pressure to consumer prices,” said Stephen Kates of Bankrate to CNBC. “Cutting rates while inflation is rising would be difficult to justify, even if it might receive political support.”
Fed still sees rate cuts ahead
The Fed continues to project one rate cut in 2026 and another in 2027. Inflation forecasts for 2026 have been raised to 2.7%, including core inflation, while growth is now seen at 2.4% and unemployment at 4.4%.
Markets fall, Powell addresses probe
US markets declined after the announcement, with the Dow Jones falling 714 points, the S&P 500 down 1.2% and the Nasdaq dropping 1.3%. Powell also said he will stay on until a Justice Department probe into renovation costs is completed. “I have no intention of leaving the board until the investigation is well and truly over, with transparency and finality,” he said.